The financial crisis has shown that the economic growth over the past 20 years in the United States has been based largely, but not exclusively, on personal and corporate debt. The debt dependency has weakened the fundamental financial systems within the United States both corporate and personal. The financial system developed ever increasing financial tools and products that did not add to productivity or worker efficiency. The American genius has been turned to a financial gain that is hollow. The hollowness can be seen in what the huge consumer credit binge. The vast swathes of empty homes symbolise how empty the American dream has become. These homes were built upon credit and debt and not savings. In a reversal of the American idea, credit, debt, and consumer spending replaced thrift, savings, and hard work. If America is to reform, it will need to return to an earlier understanding of the American idea one built upon hard work hard, savings and most importantly livings within our means. The problem, though, is society and the American dream has been perverted so that everyone can believe that they can live beyond their means, governments as well as individuals, without facing the consequences.
For the past 20 years, our appetites, across America, got the better of us. The reasons for this are many. In this election season, we will see many solutions offered. Many commentators will use the crisis to promote their political agenda. What I propose here is something different. I want to recommend two things that the average American can do to return to the American idea. The average American can help reform America and return to the American idea.
Two ways to reform America
The two interconnected areas that this essay considers are those that the average American can influence directly and benefit from immediately. The first is the need to reform the American education system. The issue, though, is not what many political pundits want us to consider. The issue is not unions, home schooling, or public vs. private education. Instead, it is about something fundamental. To put it theoretically, it is about education’s role in our society. To put it directly, it is about your school teaching kids to be good citizens by learning to manage their money.
The second area goes beyond the education system. It is about our relationship with credit and debt. The one area we can all control is our use of debt and credit. We may not be able to control directly the government’s budget. We may not be able to control directly how the financial firms, banks, and hedge funds speculate with credit and debt. What can control is how and why we use personal credit and debt. The average American has to get their personal credit card and consumer debt under control.
Education about money
We need an education system that can teach our children about basic finance. We need an education system that teaches what it means to have financial self-control. We need an education system that can tell young people why they need to save money and how to do it. The proposals are not radical. They are not a return to some forgotten past populated by Ben Franklin. Instead, it is the basic goal of what it means to be an educated citizen. Our education system has failed generations of Americans because they cannot understand or resist the lure of easy money, credit, and debt. Instead of seeing that the credit splurge, the demand to have 0% financing is fundamentally unsustainable, the American consumer has been educated and habituated to believe that financing, and easy re-financing are within their reach. They have been raised to believe that such financial irresponsibility is without risk.
The financial education has been sadly lacking within American schools from kindergarten through to the MBA programmes regarding risk, reward, and living within means. The MBA programmes encourage this financial perversity. The goal is not to teach students to balance their books. Instead, it is to teach them to leverage the books. Students are not rewarded for their ability to save or live within their means. Instead, the focus is on elaborate and exotic financial instruments that allow, and encourage, the excessive risk taking needed for corporations to live beyond their means. Research has shown that how the CEO views debt will be the way the company views debt. Perhaps we need the average person to stop using firms that have risky approach to debt.
Has academia become a business in love with corporate sponsorship?
Our education system, intentionally or unintentionally, teaches our children that public service is not an ideal. Instead, they are being taught to pursue money, celebrity, and status without consider the risks or what purpose lies behind the goals. Instead, they are encouraged to pursue wealth without regard to its effect. No matter the risk or consequences, complex financial products can be used to hedge it or offset it. Yet, the complex financial tools and products have proved unable to deliver what they promised: control of risk. [link HBR? My article] What has happened on Wall Street regarding risk has infected academia. Academia has become an industry. However, the problem is deeper than its structure.
Gain is good but greed is bad.
The issue is not about capitalism. Instead, it is about how the financial system and the political system have become mutually dysfunctional. Wall Street has become infected with an unhealthy approach to risk. The belief they can control risk and avoid any consequences has allowed Wall Street to infect Main Street. We see the average citizens taking financial risks, leveraging their mortgages, in speculative ventures. They pursue such risks without the knowledge or resources to sustain them. What was not communicated was that a risk by Goldman Sachs may be manageable with their scale, knowledge, and resources. By contrast, the same approach to risk by an individual would prove catastrophic. Research backs this point up when looking at subprime mortgages. The loan companies and banks were preying upon people with poor financial literacy. Research on the mortgage defaults showed a strong correlation between poor financial literacy and an increased mortgage delinquency on subprime mortgages.
At the same time, people saw sub-prime mortgages as a way to refinance for consumer debt. In doing this, they may have thought they were saving money, but they were only increasing their financial burden with greater risk. People accessing sub-prime mortgages were using them consumer spending or other short-term debt like car purchases. They had neither savings nor income to justify neither the long-term debt (mortgage) nor the short-term debt (consumer spending). They were living beyond their means.
Wall Street’s excess where bad gain has replaced good gain
The financial crisis revealed a pursuit of profit has become shockingly immoderate on Wall Street. For the firms operating within the financial system, there is no deal too big, there is no profit too large, there is no financial instrument too complex to pursue. The financial instruments were designed on Wall Street for Wall Street because of the need to deal with risk. We saw financial firms creating financial instruments to use with other financial firms to avoid suffering a lost yet neither side willing to explain the risks. They were both entering the exchange believing they had placed the risk on the other. All that matter was the belief they had passed the loss to someone else.
Have we lost sight of the common good?
The financial crisis goes beyond unemployment, jobs, or economic growth. America’s belief in the common good is in crisis. As Montesquieu warned, Republics fail when they become gorged on luxury and consumption in which status is related to celebrity and measured by wealth. We can see this as the political system rewards excessive risk, excessive financial contributions, and require excessive resources. Americans have become dependent upon a political system that depends upon the financial system.
Our future, our choice, our children.
To reverse the crisis we need reform. We need to change the education system so that we change our relationship with the financial system. If we cannot sustain these reforms, we will lose the fundamental principles of the regime. Educational reform is the only way to change America’s future because it is what shapes the young and they will be the ones to change America. Perhaps there are signs of hope as we see Americans continuing to pay down their credit card debts. If this signals a new political and economic relationship, then America may yet renew itself. If it cannot, then it will surely decline.